Liquid Natural Gas: The Fossil Fuel Disaster Spelled L-N-G

The first is a cleansing financial crisis sometime before 2030. The second is destructive civilizational breakdown sometime around 2040.

The reason? LNG’s ‘life-cycle’ emissions are only slightly less than coal. The LNG industry needs to be forced into transparency on the issue.

To avoid catastrophic global warming, the world must to move quickly to low emission energy.

That means reducing the carbon emissions per megawatt-hour (for instance) from 0.8-0.9 tonnes per megawatt-hour (coal) to below 0.4 (ie wind and solar).

LNG lies in the ‘simply not good enough’ middle at 0.6-0.8+.

LNG Life Cycle Greenhouse Gas Emissions

The US Department of Energy estimates life-cycle emissions of natural gas shipped to market as LNG as only marginally lower than coal.Source: “Life Cycle Greenhouse Gas Perspective On Exporting Liquefied Natural Gas From the United States, 2014,” US Department of Energy

Further, LNG requires hundreds of billions of dollars of environmentally damaging infrastructure that’s only economic with long-term lock in. And that’s what the industry has done — to the detriment of everyone.

To avoid this train wreck, Liquid Natural Gas’ life-cycle carbon emissions need to be disclosed, priced and levied. That way they will compete on a level playing field against renewable energy and storage.

The first step along this path is proper carbon pricing.

Carbon Prices Needed for A Sustainable Future

Weighted global carbon prices linger around $1.3 per tonne. Traded prices range from around $3 to $20. European reforms aim for $20+ by 2020. Experts estimate $40 now and $100+ later are what’s needed.
Sources: High-Level Commission on Carbon Prices, US General Accounting Office, Exxon, Baker-Shultz Carbon Tax plan, International Energy Agency, state of California, European Union Emissions Trading Scheme.

At present, traded prices languish below $20 per tonne and some below $10. Major reforms are planned for 2020 and beyond. At the high end, the High-Level Commission on Carbon Prices argues $100 carbon is needed by the early 2020s. The US General Accounting agrees on the $100 figure, but around 2030. Even Exxon uses hypothetical future prices of $80.

Such prices need to be ‘fitted’ to historical price data and incorporated into future price expectations.

Using Henry Hub natural gas price data from 1997, and applying nominal $5 carbon prices to that, rising at 5% per year to $40 now (the social cost) and rising to $70 by 2050 (an unambitious number), it indicates a future cost of ~$5 per mwh by 2033 at a time when wind and solar are falling steeply and by then will be cheaper.

And what all that points to is increasing uncompetitiveness for LNG with its high sunk costs. The solution is for these companies to go bankrupt due to their bad bets. Their shareholders can take the hit. That’s market economics.

This will limit the broader damage to society, since shareholders were willing participants in a losing industry. The other alternative is to spread the losses widely through an aggressive expansion of the LNG industry. But that disproportionately favors LNG industry insiders to the detriment of everyone else.

Effect of Rising Carbon Prices on Natural Gas Trade

Applying $5 per tonne carbon prices rising at 5% per year to Henry Hub natural gas prices provides a clearer picture of the true environmental economics of the international Liquid Natural gas trade as carbon prices move to $70 and above by the late 2020s. As LNG becomes priced out of the market, collected carbon levies can fund investment in clean energy.Sources: Henry Hub Prices, US Energy Information Administration;“Renewable Power Generation Costs 2017’” International Renewable Energy Agency

Looking at forward forecasts by companies like Shell, they see a broad expansion of the LNG industry out to 2050, with generally flat natural gas prices untroubled by carbon pricing.

But if this expansion of the LNG industry occurs, it will almost certainly put the world on the path toward 4c temperature rise.

Stated conversely, if the world limits warming to 2c amid an uncontrolled expansion of LNG with all adjustment forced on to other industries

Emission Adjustment Burden On Other Industries to 2030 Of LNG Expansion

If global Liquid Natural Gas (LNG) trade expands in line with industry forecasts at the same time as the world drastically reduces carbon emissions, the LNG trade will account for roughly 30% of global emissions by by 2030.

The first: carbon pricing spurs a financial crisis as huge investments in LNG are prematurely written off. That outcome will mostly affect reckless shareholders in LNG companies. Broader society may largely dodge the bullet.

The good news in this scenario is that clean energy alternatives will be fully competitive by 2030 (likely earlier). What this means is huge writeoffs for exposed industries and their bankers but sparing the larger economy.

The second: uncontrolled global warming that spurs civilizational chaos. The only winners will be the rich and well-connected. Everyone else will have to fend for themselves.

Both outcomes are bad. But the better outcome of the two is a financial crisis caused by carbon pricing. That will cause premature write down of huge LNG capacity, but the effects should be limited to the corporate sector.

Allow strategic bankruptcy and wipe out of shareholders will limit the broader damage to society. Shareholders should have known better.’